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The Pre-Budget Economic Scenario- Is it as good as it is projected?

The much awaited Pre-Budget Economic Survey is out. As always, it captures the scenario quite articulately but is the picture what it is? Highly debatable indeed. Let us analyse 3 critical economic factors discussed in the survey.

Finding #1: It has pegged economic growth at 7 to 7.75 % for fiscal yearn2016-17. But, this has come with a rider, by implication, calling upon the Government to pursue economic reforms, cut subsidies and to introduce GST. It has also cast doubts on this prediction highlighting possible downside risks associate with the “weak global economic scenario”

Observation: In this direction we must remember that in the previous year’s Economic Survey the GDP was projected to expand @ 8.1 to 8.5 % but today the Survey expects the ultimate GDP growth to end at 7.6%, a decline of around 10% . Staggering, given the size of our GDP , with the Survey cautioning that it will take a “couple of years” for the country to achieve the potential 8 to 10 % GDP growth. Further the last Economic Survey spoke of “double digit economic growth trajectory”. We do not see it happening, do we?

Finding #2 : The Survey referred to India as a “haven of stability” in an otherwise gloomy global landscape. Again it warned of possible backlash due to the currency turmoil resulting from the recent devaluation of the Renembi/Yuan. But in the same breadth it reports that “With focus on reforms in key sectors coupled with stable macroeconomic conditions, the growth prospect for the economy in the next year appears reasonable,” with a rider that “headwinds may come from sluggish global demand”.

Observation: Last year the survey predicted the inflation @ around 0.5 to 1% below the target of 5%. The actual rate of inflation for the fiscal year 2015-16 should therefore have been in range of 4 to 4.5% . But the actual was at 4.96%. Obviously the projection of the survey did not materialize. Exports declined by 17.6% as against a decline of 15.5% in the imports in the backdrop of an expected growth in the previous year’s survey

Finding #3 : The Survey has opted to stick to the fiscal deficit being at 3.5% of the GDP for the next fiscal year, on grounds of “credibility and optimality” and contended that though the current, fiscal deficit of 3.9% will be met, it has cautioned that the next financial year will be “challenging” given the additional burden on the Government on account of Rs 1.02 lac- Crore bill in pay hike for Central Government Employees and another Rs 1.8 lac Crores towards bank capitalisation.

Observation: The previous year’s Survey had predicted that the Government will be in a position to peg the fiscal deficit at 3% of the GDP but the estimate in the Budget was @ 3.9%. Even to hold it at 3.5% is a herculean task. This should be given due weightage, in the backdrop of the Survey suggesting the deficit be narrowed by 0.2 to 0.03% of GDP over the next 5 years so as to take it to 3% by end of 2020-21. Further the Survey was of the opinion that the burden of additional pay on account of the 7th Pay Commission is not expected to have any adverse impact on inflation. Difficult to digest indeed!!!

Notwithstanding the above the Survey finds that “India’s economic growth is amongst the highest in the world, helped by a reorientation of government spending toward needed public infrastructure. For the sake of us all, let us hope that at least this time the Survey is not tinged with political flavor.!!!!